TAX REFORMS 2021 AND BEYOND
With weeks to go before the 2021 budget is announced, there are various talks with regards to increasing taxes to pay for the COVID pandemic. This will be required to reduce the trillions of debts, without hurting our growth in the process.
However, this will probably be a gradual process and of course, we are not out of the woods just yet.
The general feel is that this year will be guided around the gradual closing of business support grants, furlough schemes and of course what the 4th grant will be based on, if it includes the millions that did not qualify for the first 3 and of course, when this can actually be claimed.
It is expected to be announced as part of the budget, although relates to the period Feb 21 to April 21. There are thoughts that it may include a one-off payment up to £7500 which will be granted to those that did not qualify previously, however, it has not been confirmed and the details have yet to be released.
So… increasing taxes roadmap – which taxes should these come from?
There is the obvious thoughts of increasing Income Tax, possibly reforming Stamp Duty Tax and maybe Council tax and Business Rates, especially looking at the current state of our high streets …. But what about the other taxes that could also be in line for a reform?
As we are now not part of the EU, the UK is now in a position to make its own VAT laws, meaning that this maybe a good time to start to reform VAT. Not only could they increase this tax, but they could also increase the types of goods that are marked as zero rated or exempt from VAT.
The rate of VAT has been 20% for over 10 years, having been increased from 17.5% to 20% back in January 2011. The average VAT rate in the EU is 21%, with a handful being under UK rate, but the majority are higher.
However, this could be entwinned with decreasing the VAT threshold gradually or scrapping it altogether.
With the success of ‘Making Tax Digital’ (MTD) for VAT and the rollout to include Income Tax for Individuals and partnerships come April 2023, many feel that reducing the current £85k turnover threshold could well be on the cards.
Benefits of such a move of ensuring all businesses have to register for VAT include:
- Eliminates competition challenges between VAT registered and non-registered businesses
- It would remove the significant problems small businesses face in order to stay under the threshold
- It would also bring VAT and Income Tax in line with each other, ensuring all are keeping records digitally and reporting quarterly, enabling a smooth transition for April 2023.
Currently, VAT registered businesses under the threshold do not need to register for MTD until April 2022. Therefore, a gradual introduction of scrapping the threshold altogether could coincide with the scheduled roll out dates.
It is likely this thinking would not only increase the tax yield for Exchequer, but also increase productivity and improve the level of compliance too.
Other EU countries including Spain and Italy already have no threshold and as it appears to work well, the UK may well follow suit. Although, in order to not cause too much disruption at once, this could be introduced in stages as done with MTD and the changes to tax relief given on mortgage interest and Rental of properties.
It is reported that 44% of VAT registered businesses are already under the threshold and have registered voluntarily, which some would say, clearly shows that the process is not such a burden as some critics may suggest. In any case, with MTD being rolled out to include Income Tax in 2023, keeping records digitally and reporting quarterly will become the norm and therefore will not be seen as an extra burden on small businesses.
Over 40’s Tax
Before the COVID crisis, there were cross party talks discussing the possibility of introducing an extra tax payable for the over 40’s.
Due to our ever-increasing ageing population, there is a need to fund the current cost of our social care and previously, they were looking at around an extra 2.5% tax to pay if you are over 40 to help plug the ever-increasing gap.
With the pandemic highlighting the problems we face with care homes and the extra burden put on NHS, this could well be introduced, but maybe affecting adults now younger than 40.
With COVID also heavily affecting the over 70’s, this could well be a move they may consider. Germany have already implemented a similar scheme that apparently works well and therefore the UK may well follow suit.
For sure, come 3rd March 2021, Mr. Sunak will deliver the 2021 Budget and in hand with the success of the roll out of the COVID vaccine; hopefully, our future will start to look a little clearer and the roadmap for easing the restrictions and indeed paying back the mass debt COVID has created, will be laid out, for all to see.